The pernicious effects of the reenacted budget

Weslene Uy, Economic Fellow of the Stratbase ADR Institute

President Duterte finally signed the 2019 General Appropriations Act, after almost four months of operating on a reenacted budget, two months since lawmakers supposedly ratified the bill, and eight years since the budget was last reenacted. This concluded a tumultuous year punctuated by standoffs and squabbles, as lawmakers wrestled over taxpayers’ money.

Limited to a reenacted budget for the first quarter of the year, salary increases for government employees, including military and uniformed personnel, have been delayed. New and ongoing infrastructure projects have been affected, while funding for social services have been stalled. Unable to fully execute its programs and projects, the delay in the budget’s passage will thwart the government’s job creation and poverty reduction efforts.

By the National Economic and Development Authority’s (NEDA)’s own estimate, a reenacted budget until April will slow GDP growth by 6.1% to 6.3%, which is slightly more conservative than the trimmed forecasts of multilateral agencies. However, the longer it takes the government to mobilize its resources, the slower the economy is expected to expand. Should this happen, this will be the first time the country’s GDP will go below 6% since 2011 — during that period, government spending slowed as the Aquino administration untangled deals made during his predecessor’s time.

The balance sheets for the first quarter of the year already provided us with a glimpse into the effects of the reenacted budget.

Total revenue collections, which Bureau of Internal Revenue (BIR) collections form the bulk of, amounted to PhP 687.7 billion last quarter, up by 11% year-on-year, but slightly short of its target by 0.03%. The increased collections were attributed partly to the higher excise taxes of some products under the TRAIN Law. Both revenue-collecting agencies maintained their momentum, exceeding its collections from the previous year and, in the case of the Bureau of Customs, surpassing its targets for the first quarter of 2019 by 12%.

Amidst the improving revenue performance, state spending performance was more modest in comparison. Despite posting year-on-year increases in February, disbursements in January contracted by 7%, largely as the government had to recalibrate and undertake measures to minimize disruptions. For the first two months, faster infrastructure and personnel services spending boosted the disbursement performance. Personnel services grew by 12.5%, on account of new personnel hired towards the end of 2018 and the release of incentives and pension differential payments for government employees. Infrastructure and other capital outlay expenditures grew by 26.3% due to account payables for completed infrastructure projects in the previous year. Initial data for March, however, show that government spending slipped by 8%, and missed its program by 16%. For the first quarter, disbursements amounted to PhP 778 billion, and fell short of its program by 11%.

Preliminary data from the Bureau of Treasury (BTr) also reveal how the fiscal deficit shrank amidst the failure to pass the budget by the earlier first quarter deadline. During this period, the fiscal deficit dropped by 41% to PhP 90.2 billion, as government spending was unable to keep pace with its program. According to the Department of Finance, the underspending amounted to Php 1 billion every day for primary expenditures.

In January, the BTr recorded a surplus for the first time in 9 months, with the 7% disbursement contraction offsetting the 7% revenue expansion. In February and March, the government reverted to a budget deficit, as disbursements rebounded faster than the growth in revenue collections. Yet, this deficit is still narrower compared to the same period in 2018.

Operating on a reenacted budget meant that the government squandered its momentum in 2018, where the budget deficit reached PhP 558.3 billion or 3.2% of the GDP, slightly higher than the 3% deficit target, and the highest as a percentage of GDP since 2010. This indicated that the government has gone beyond its cycle of underspending. Last year, government disbursements increased by 21%, while revenue collections grew by 15%. During the Duterte administration, the budget deficit has averaged at 2.7% of the GDP.

Notwithstanding the hiccups in its spending plan, the government set the budget ceiling for 2020 at PhP 4.1 trillion, a 10% increase from the appropriations in the current year. With its most ambitious disbursement program to date, we can only hope that legislative impasses, which could have been averted, will not stand in the way of the budget’s timely passage again.